U.S. Competes With China for Influence in Cuba

U.S. Competes With China for Influence in Cuba
Chinese firms lead efforts to build Cuba's Internet infrastructure
By CAROL E. LEE And FELICIA SCHWARTZ
March 18, 2016 5:30 a.m. ET

WASHINGTON—As the Obama administration works to expand economic
relations with Cuba, it is competing for influence with a familiar
rival: China.

Since the White House embarked on restoring relations with Cuba—an
effort culminating in President Barack Obama's historic visit next
week—the U.S. has run up against China's efforts in recent years to
build an economic relationship with the country.

China's trade with Cuba grew by 57% in the first three quarters of 2015
to $1.6 billion, rebounding from an usually weak period the year before,
according to Beijing. Direct flights from Beijing to Havana started in
December. And China is leading efforts to build Cuba's Internet
infrastructure.

"You have Chinese influence really across the board," said Richard
Feinberg, a former U.S. diplomat who studies the Cuban economy at the
University of California, San Diego, and the Brookings Institution in
Washington. "From the Cuban point of view, they're still paranoid about
America."

Though China is Cuba's second largest trading partner, it is far behind
Venezuela, illustrating the limited business opportunities for most
countries under Cuba's current system. Joint ventures and foreign direct
investments from China are relatively small—though plans for a cluster
of resort properties are estimated to be worth $460 million, including a
luxury housing project near the Marina Hemingway that will house Chinese
tourists.

But China's investments in Cuba are likely to grow, said Xu Shicheng, a
leading Chinese expert on Cuba at the state-backed Chinese Academy of
Social Sciences, as a loosening of U.S. restrictions opens Cuba's access
to the broader, global economy.

"This improvement in relations between Cuba and the U.S., if it brings
about a relaxing of restrictions, would benefit future Chinese
investment in Cuba," he said.

Unlike other places where Washington and Beijing compete for influence,
Cuba's cultural attachment and proximity to its American neighbor may
offer a potential advantage to the U.S. The White House is betting that
connection will help Washington rival Beijing not only in economic
influence, but also in the battle for the country's political future.

Those dynamics loom large as a series of deals with major American
companies work through U.S. and Cuban pipelines ahead of Mr. Obama's
visit. Several major U.S. companies are poised to secure deals that give
them a foothold in Cuba, including AT&T. On Thursday, the U.S. Postal
Service said it had resumed direct mail service with Cuba for the first
time in more than 50 years, while Cuba said it would lift a 10% penalty
on dollar exchanges.

Most advances for American companies have been in the tourism industry.
The Obama administration has granted particular leeway for
telecommunications firms in loosening regulations. But the most notable
achievements there have been roaming agreements that benefit American
travelers.

Lingering tensions between the U.S. and Cuban governments remain notable
in the telecommunications industry. Mr. Obama has authorized U.S.
telecommunications companies to operate in Cuba. But Havana has resisted.

China, on the other hand, leads in helping to build Cuba's Internet
framework, although there likely are future opportunities for U.S.
companies, in part because Cuba's existing, planned system is already
outdated, said Larry Press, a professor at California State University,
Dominguez Hills, who writes about Cuba's Internet infrastructure on his
blog, The Internet in Cuba.

"The biggest opportunity isn't going to be in the short-run," Mr. Press
said. "The Wi-Fi they're rolling out is today's Wi-Fi. The home
connectivity, the DSL they're talking about rolling out is yesterday's
home connectivity."

Cuba announced in January that it was launching a pilot project to
provide broadband home Internet access in Old Havana. Residents there,
as well as cafes, bars and restaurants, will be able to order service
through fiber-optic connections operated with Chinese telecom operator
Huawei Technology Co. Ltd.

Huawei equipment also was used in the installation last year of dozens
of Wi-Fi hot spots across Cuba. In January, Cuban state
telecommunications company Etecsa said it would open 30 more Wi-Fi hot
spots in Havana alone. But for most Cubans, access to these hot spots
remains expensive at $2 per hour.

Overall, U.S. officials have said Cuba has responded coolly to American
telecommunications proposals, including from Google and other companies,
saying they want to move forward on their own terms.

"Partly that's a result of the fact that historically we've tried to use
telecommunications as an avenue to undermine their government, and so
consequently they really don't trust our hardware," said William M.
LeoGrande, a professor of government in the School of Public Affairs at
American University in Washington, D.C., who has written a book on
U.S.-Cuba relations.

Cuban officials' reluctance to broaden Internet access stems in part
from fears about losing the tight controls they wield over data access.
These suspicions aren't totally without merit. The U.S. in the past has
launched digital efforts to try to undermine the Cuban government,
including Zunzunzeo, a Twitter-like service whose users didn't know the
service was sponsored by Washington.

"If this is a national-security issue, I want to do business with my
ideological partners or allies, not with what I see now as the enemy or
the Trojan horse," said Ted Henken, a professor at Baruch College, City
University of New York, who has studied social media and the Internet in
Cuba.

China has been investing in Cuba over several years, although its
ventures haven't always been lucrative, according to Mr. Xu of the
Chinese Academy of Social Sciences.

The U.S. embargo has made it difficult for Chinese factories in Cuba to
sell their goods in the region, while Cuba's restrictive rules on
foreign investment make it hard for Chinese companies to hire the
workers they want or send money back to China, he said.

China's Ministry of Foreign Affairs didn't respond to a request for comment.

The competition between the U.S. and China extends beyond Cuba into the
region more broadly. The U.S. is playing catch up in Argentina, where
Mr. Obama will visit after spending just short of three days in Havana.

Over the past decade, China increased commercial and diplomatic ties as
Argentina's government eschewed U.S. policy initiatives in favor of Beijing.

In 2014, Chinese President Xi Jinping visited Buenos Aires and pledged
to loan Argentina $7.5 billion at a time when Argentina couldn't tap
credit markets because of a legal dispute with U.S. bondholders. The
China Development Bank agreed to lend Argentina nearly $5 billion to
build two hydroelectric dams in Patagonia. A Chinese company previously
had won a highly criticized auction in Argentina to help construct the dams.

Opposition legislators were critical of the deals, arguing that the dams
were unnecessary and too costly. President Mauricio Macri's government,
also skeptical about the agreements, has been studying them. But aides
to Mr. Macri say he will likely let the deals go forward, partly out of
concern about antagonizing China.

More controversially for U.S. officials, Argentina's Congress voted last
year to let China build a space station antenna in the province of
Neuquén, giving China the right to use the station for 50 years. U.S.
officials have voiced concerns about the nature of the antenna, fearing
it could be used for both civilian and military purposes. Argentine
officials have played down those concerns, saying the facility is
strictly for civilian scientific purposes.

Last November, the countries agreed to a deal that would have China
build two nuclear power plants in Argentina. The $15 billion deal would
be financed mostly by China.

Mr. Obama is seeking to reset U.S. ties with Argentina following the
election of Mr. Macri.

In time, the Obama administration's policies on Cuba might make China
less attractive as an investor in Latin America, said Jason Marczak, a
Latin America expert at The Atlantic Council who has studied China's
role in the region.

"By opening up with Cuba we've cast aside the veil of imperialism that
has oftentimes befuddled us, and shown that we can really be a partner
with the rest of the region," he said.

—Josh Chin and Taos Turner contributed to this article.

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